What are Double Taxation Avoidance Agreements?

Double taxation is an issue related with taxation of income that crosses boundaries. Here, an individual or a company may be earning his/ its income in a foreign country. But that income is transferred to the home country. The issue is that who has the right to tax such an income.  

Definitely, the source country (the country where income has generated, the country where the company or individual worked) would like to tax the income generated there.

Similarly, the resident country (where the individual is residing or the company is incorporated) to which he/it belongs also tries to tax the income. This is because; the income is generated by its resident. Now if both countries try to tax the person/company, it is double taxation. Double taxation means taxing the same income twice, once in the home country and again in the host country.

Such a double taxation discourages the individual/company to engage in economic activities overseas. Hence, there should be mechanisms to avoid double taxation. But, there is no international law to avoid double taxation. So, it is for the countries in the international arena to solve double taxation problems by preparing bilateral agreements.

Hence, negotiations are taking place between different countries and as a result, large number of Double Taxation Avoidance Agreements (DTAAs) are reached to facilitate cross national economic activities by avoiding double taxation.  

Double taxation avoidance treaties comprise of agreements between two countries, which, by eliminating international double taxation, promote exchange of goods, persons, services and investment of capital. These are bilateral economic agreements where the countries concerned evaluate the sacrifices and advantages which the treaty brings for each contracting state, including tax forgone and compensating economic advantages.

The right to tax a particular income, rate of taxes etc are reached after bilateral discussion with the other country under the DTAA process. This is needed because each country has its own unique tax laws.

India has signed 92 DTAAs with other countries.  Many of these agreements contain additional facilities like Tax Information Exchange Agreements aimed at providing tax payment information about cross national income.

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